Compensation and Benefits
Domain 3: Compensation and Benefits
This domain tests pay structure mechanics, market pricing, incentive design, and the regulatory rules governing qualified retirement and health plans. Expect calculations as well as definitions.
Core rules and concepts
- Compa-ratio = actual pay ÷ midpoint of the pay range. Range penetration = (actual pay − range minimum) ÷ (range maximum − range minimum). They answer different questions.
- Market pricing typically uses survey medians or means, with survey data aged to the present using a budget or structure adjustment.
- Qualified plan limits (2024): 402(g) elective deferral $23,000; 415(c) annual additions $69,000; compensation cap $345,000. Limits are indexed and change annually, so use the year stated in the question.
- Vesting: ERISA sets maximum schedules for employer contributions (for example, a 3-year cliff or 2–6-year graded schedule). Safe-harbor 401(k) contributions must be 100% vested.
- Nondiscrimination testing: the ADP and ACP tests cover elective deferrals and matching contributions; top-heavy rules require minimum contributions when key employees hold more than 60% of plan assets.
Worked example
A pay range is $50,000–$70,000 with a midpoint of $60,000. An employee earns $54,000. Compa-ratio = 54,000 ÷ 60,000 = 0.90, or 90%. Range penetration = (54,000 − 50,000) ÷ (70,000 − 50,000) = 4,000 ÷ 20,000 = 20%. The employee is paid below midpoint but sits in the lower fifth of the range - useful for equity analysis.
Traps that cost marks
- Mixing compa-ratio and range penetration.
- Using the wrong plan-year limit; limits are indexed annually.
- Assuming all employer contributions can use a five-year cliff; ERISA caps the schedule.
- Forgetting that elective deferrals are always 100% vested.